March 14, 2017

Demand Erosion and Category Management: What’s the Connection?

Millennials are driving less than previous generations. For them, owning a car is considered a hassle, and young people will even delay getting their licenses, in favor of other means of transportation. Meanwhile, government regulations continue to push higher vehicle fuel efficiency. Tesla has announced a 315-mile range electric battery. All of these signs point to a prolonged period of fuel demand decline for many countries around the world — and certain countries are adjusting quickly to the erosion by breaking into newer technologies.

Take Japan, for example. It leads all other countries in fuel cell electric vehicle (FCEV) adoption and hydrogen station deployment, according to Vice President of Location Services, Debbie Miggins. She goes on to state that while the U.S. does rank second in FCEV adoption, "Japan's FECVs are 2.5 times higher and hydrogen stations are 1.6 times higher as of 2016...[and the country is committed] to build 160 hydrogen fueling stations by 2020, with that number doubling by 2025. Those stations will be needed to support the 40,000 fuel cell vehicles the Japanese Ministry of Economy, Trade, and Industry (METI) expects to have on the road by 2020. And that number is expected to increase to 200,000 by 2025."

Few people would debate fuel demand decline globally. But the real question isn't about whether or not demand is declining or at what rate. It's about how the industry should adjust in the face of declining demand. The fact is, fuel marketers are concerned for the future of their companies. In the fuel business, small declines can have an enormous impact on overall company profitability.

I believe the answer to demand decline is relatively simple: Category Management.

Understanding Category Management

Category Management is not new to the industry; it has been around since the birth of convenience stores. Beer, candy, salty snacks and packaged beverages are all "categories" that require daily management within the store and the industry. With a look at the tobacco industry, we can find a key example of increasing category management to address demand decline. Evolving with the decline in cigarette smoking rates over the last decade, industry players have focused on the expansion of alternative tobacco products like snuff, snus, cigars, hookah and vapes to fill the significant gap.

Similarly, the fuel and convenience store industry needs to start managing fuel as its own category. You see it starting to happen more and more — marketers are adding diesel dispensers, considering new products like E-85 and hydrogen fuel, and even adding electric-charging stations to their locations — all in an attempt to fill the gap left by fuel demand erosion and position retailers as a destination stop for the long-term.

Investment in the forecourt is never easy and never inexpensive, but the marketers that treat fuel as its own category, and manage that category methodically and analytically, will build a network of locations fit for the long-term fight against demand erosion.

Investing in Merchandise and Promotional Sales

In thinking about making your location as a destination stop for the long-term, you need not only think of fuel as its own category, but also how you can capitalize on different categories when one is down. For example, how can you boost in-store profits when forecourt demand is down?

To combat fuel demand erosion and the effect on profits, don't just sell fuel. Invest in your merchandise and promotional sales. It's kind of like "you have to stop JUST selling fuel in order to sell MORE fuel." Promoting the right products at the right price not only drives profit opportunities inside the store, but drives synergies between the fuel forecourt and store. When you focus on your brand, your merchandise and your promotions, you're making your site a destination stop — where visitors can also purchase the fuel they need.

Looking for opportunities for profitability

To effectively treat fuel as its own category, marketers should look toward understanding opportunities for profitability at each location. Continue playing in the fuel space while upgrading category management skills by identifying the ideal locations to add diesel or E-85, or identifying stores where you might eliminate slower-moving fuel blends to make way for new ones. You might also want to locate markets that could be strong for future demand in hydrogen.

You may want to look to your merchandise and promotional sales as opportunities for profit lifts, too.

This identification process requires a global understanding of the fuel market and the technology expertise to solve complex, local problems. Further, once you execute a fuel category strategy, you'll need a pricing strategy to back future shifts across all products. Look to Kalibrate for partnership and Total Site Profitability will be just around the corner.